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Strategic Acquisition for Akamai

Akamai Technologies Inc. (AKAM) has agreed to acquire Verivue, a provider of IP platforms and solutions for network operators. The acquisition will enable Akamai to strengthen its cloud infrastructure solutions portfolio. Akamai expects to close the deal by the end of this year, but the financial details were undisclosed.

Along the same lines, Akamai had acquired FastSoft (in September 2012) and Cotendo (late 2011). We believe that these acquisitions not only broaden Akamai’s CDN solutions portfolio, but also provide the company with a significant competitive edge over other established CDN providers such as Limelight Networks Inc. (LLNW) and Level 3 Communications Inc. (LVLT). Akamai can also enjoy competitive advantage over new entrants like CDNetworks, AT&T Inc. (T) and Verizon Communications Inc. (VZ).

They will also have a positive effect on Akamai’s cloud optimization solutions. Cloud infrastructure solutions contributed approximately 58% of Akamai’s total revenue in the third quarter of 2012. While revenue from cloud infrastructure solutions increased 22.0% year over year, content delivery solutions jumped 23% year over year driven by increased demand for optimization, performance and security solutions, and strong traffic growth.

On a positive note, Gartner expects the cloud services market to grow over 3 times by 2015 to $177.0 billion. According to market research firm IDC, spending on public cloud services is expected to reach $100.0 billion by 2016. This tremendous growth potential and the rapid adoption of cloud technologies will particularly help Akamai’s enterprise business in the long run.

Akamai has a strong presence in the content delivery market. However, intense competition has forced it to lower the price of its content delivery network services, particularly the digital media services, which will hurt its margins. Moreover, increasing total bandwidth costs remain a headwind for Akamai in the long run.

We maintain our Neutral recommendation on Akamai over the long term (6-12 months). Currently, Akamai has a Zacks #2 Rank, which implies a short-term Buy rating.